For years, passive income giant Phoenix Group Holdings (LSE: PHNX) slipped under the radar of the wider investment community. I think this was due to its operating via various brand names that were much better known. These included Standard Life and SunLife.
Indeed, Phoenix did not come to my attention until March 2023 when the prices of many financial sector stocks tumbled. This followed market fears that the collapse of Silicon Valley Bank would precipitate a broader financial crisis.
I thought this extremely unlikely, given the capital boosting measures put in place in Western financial hubs after the 2007/2008 crisis. So this collective mini-panic meant that a host of terrific financial stocks looked in bargain territory to me.
I duly bought several of them for my passive income portfolio. This is money made with minimal effort by the investor, as with dividends paid by stocks.
At that point, Phoenix Group was generating an annual dividend yield of nearly 11%! It has come down since, as the mini-crisis passed and more investors discovered the stock. This is because a share’s dividend yield falls as its price rises, provided the annual dividend stays the same.
Nonetheless, it is currently delivering a yield of 8.1% — one of the highest in the FTSE 100.
How much passive income can be made?
With £11,000 being the average UK savings amount, investing this in 8.1%-yielding Phoenix Group shares would make £891 in dividends in the first year. Over 10 years on the same basis, this would rise to £8,910, of course, and over 30 years to £26,730.
I use 30 years as a rule-of-thumb investment cycle, as it implies someone starting at 20 and looking to retire around 50. Of course, I also assume the investor is buying other stocks as well — £26.7k will not be worth as much in 30 years’ time!
It is also crucial from the perspective of using dividend compounding to maximise investment returns for later life. The longer this standard investment practice is used, the greater the extraordinary effect it has on such returns. And all it involves is reinvesting the dividends straight back into it.
To use Phoenix Group as an example – with compounding employed, there would be £13,660 of dividends after 10 years, not £8,910. And after 30 years, the amount would be £112,932 rather than £26,730! This is using the same 8.1% yield as an annual average over these periods.
This means that the entire value of the Phoenix Group holding after 30 years would be £123,932. And this would be paying an annual passive income from dividends of £10,038.
The dividend and yield outlook
Ultimately, what drives the dividends and share price of any firm is growth in earnings.
A risk to Phoenix Group’s is the high degree of competition in its sector that may pressure its margins. However, consensus analysts’ forecasts are that the firm’s earnings will increase by a stunning 96.72% every year to the end of 2027!
As an adjunct to this, analysts project that it will increase its dividends to 55.8p this year, 57.4p next year, and 58.9p in 2027. These would generate respective yields on the current share price of 8.3%, 8.6%, and 8.8%.
I will be buying more of the stock very soon, given these stellar earnings and yield forecasts.
